Charities Brace for State Cuts

Nonprofit groups told to expect hard times until 2006

As states continue to grapple with a fiscal crisis that some economists have described as the worst in 50 years,

budget experts and charities in many locales are concerned that nonprofit groups could be big victims in the next rounds of government cuts.

Two new studies released last week by the Aspen Institute, a think tank in Washington, show that while states have trimmed their allocations to charities during the economic downturn, the worst cuts are yet to come. And while some signs indicate the economy is improving, charities might not benefit from that recovery — assuming it holds — for several years.

“If you look at the economy, things are obviously improving,” says Nicholas W. Jenny, a senior policy analyst at the Nelson A. Rockefeller Institute of Government, in Albany, N.Y., which studies state finances and produced one of the studies for the Aspen Institute. “The stock market has picked up this year, and consumer spending continues to rise. But it’s going to be a long time before states get back to producing the levels of revenue they did a few years ago. For that reason, nonprofit groups don’t have much chance of getting more money from states until at least fiscal 2006.”

While many nonprofit organizations, especially those that rely on state money, are painting a bleak picture for 2004, a recent survey of 500 charities by the Johns Hopkins University’s Center for Civil Society Studies, in Baltimore, found that many charities remain optimistic. About half the respondents expected to increase their budgets for the coming year, says Lester M. Salamon, the center’s director. Of those, 60 percent expected their charity to experience a decline in government support but said they hoped to make up the losses from other resources, he says.

$34.6-Billion Shortfall

According to research produced by DePaul University for the Aspen Institute, however, 40 states in the 2003 fiscal year had a cumulative $34.6-billion shortfall in their “general funds,” the portion of their budgets from which most allocations to nonprofit groups come. For the current fiscal year, which started for most states on July 1, deficits are continuing to swell, while spending, after adjusting for inflation and population growth, may be lower than it was two years ago.

While support for charities comes mostly from individuals, government support accounts for 31 percent of their income on average, according to the DePaul report. Woods Bowman, an associate professor of public service at DePaul University and author of one of the Aspen reports, estimates that nonprofit dependence on government aid is actually higher than 31 percent because some groups receive a portion of their government money as fees for services.

Mr. Bowman says states’ efforts to rein in deficits have largely avoided wholesale elimination of nonprofit programs, but he says that may not last. “They’ve run out of other things to cut,” he says. “The situation’s going to get worse before it gets better.”

Groups that have lost state funds have had a difficult time finding other support from individuals, foundations, or corporations, Mr. Bowman says: “There is no place to turn to make up for cuts.”

Small Charities

Small social-service organizations in every region of the country are feeling the brunt of the reductions, according to the DePaul report, especially groups that do not receive money from federal programs.

A poll of 27 state nonprofit associations for the DePaul study shows that many charities are forming partnerships with other groups, reducing the size of their staffs, or cutting programs altogether.

State budget problems are perhaps most pronounced on the West Coast, according to the reports, where the loss of high-technology jobs in California’s Silicon Valley, Seattle, and Portland, Ore., and manufacturing-job cutbacks in Oregon and Washington State have sent state revenues in those states spiraling downward.

California’s budget deficit — projected to be between $10-billion and $14-billion in the 2004 fiscal year — would have represented nearly one-third of the states’ shortfall in the 2002 fiscal year, according to the DePaul report.

Last week, Gov. Arnold Schwarzenegger proposed borrowing as much as $15-billion and putting strict new limits on government spending in an effort to reduce the state’s expected budget deficit. Those new limits worry many nonprofit groups, says Florence L. Green, executive director of the California Association of Nonprofits.

“All of us are afraid of getting cut, particularly health and human-services groups and arts and cultural institutions,” she says. As a result of state cutbacks during the past two years, says Ms. Green, many groups already have been laying off employees and asking others to do more.

In Oregon, which had the nation’s largest percentage of unemployed workers in September — 8 percent — demand for social services has reached its greatest level in three decades, says Lisa Wiebe, director of development at the Oregon Food Bank, in Portland, which provides food to 832 food pantries throughout the state.

Cuts in Midwest

The loss of manufacturing jobs also has affected state budgets in the Midwest, where Michigan and Wisconsin each experienced a decline of more than 5 percent in its general-fund spending in the 2002 fiscal year, the DePaul report says.

After Catholic Charities of the Diocese of Cleveland started receiving $5-million less from the State of Ohio this year, the organization had to let go 130 of its 1,750 employees, eliminate three programs, and shutter office space it occupied in buildings it didn’t own, says J. Thomas Mullen, the group’s president.

More than 70 percent of the organization’s $88-million budget comes from state and federal funds — money it uses to operate mental-health clinics for troubled teens and to produce drug- and alcohol-rehabilitation programs for adults, among other programs.

“We’ve braced ourselves to work with less support from the state,” says Mr. Mullen. At the same time, however, he says that the number of calls the organization has received in the past year for emergency assistance — people asking for help in paying their utility bills or buying groceries, for example — has increased by 300 percent, to more than 5,000 calls.

Fifty homeless shelters in 15 midwestern states have closed in the past year, according to the National Coalition for the Homeless, a Washington advocacy group.

Barbara Anderson, executive director of Haven House Services, a shelter that serves 270 homeless individuals each night in Jeffersonville, Ind., stopped taking a salary this past summer to help her organization save money.

“We’re struggling to keep our doors open,” she says. “If we don’t start raising more money from private sources, we might be gone soon.”

In Wisconsin, protests last April at the state Capitol helped to persuade legislators to restore cuts in some programs that help disabled people, says Lynn R. Breedlove, executive director of the Wisconsin Coalition for Advocacy, in Madison. But Mr. Breedlove believes that advocacy efforts may not be as successful for the next fiscal year. “It’ll be one of the worst years for disability programs,” he predicts. “Wisconsin is definitely feeling the pain.”

In the South, the states of Alabama, Louisiana, Mississippi, and Texas all plan to spend less in the 2004 fiscal year than they did in the 2002 fiscal year, according to the reports. Texas, which had the second-largest general-fund shortfall of any state, at about $3-billion, already has cut grants to nonprofit groups. This summer, Family Service of El Paso, a Texas health clinic, received word from the state that it would no longer be getting a $300,000 appropriation to operate a program for child-abuse prevention, among other cuts.

That means that instead of having a $1.1-million budget for next year, the group will have to survive on $700,000 — 70 percent of which still comes from the state, says Richard Salcido, the group’s executive director.

As a result of the reduction in state funds, Mr. Salcido says, the organization laid off 6 of its 21 employees.

In New England, despite a loss of millions of dollars in support during the last two years, social-service groups in Massachusetts have survived the cuts made to reduce the state’s $1.5-billion deficit. But with reserves dwindling and one-time accounting maneuvers exhausted, Massachusetts charities are starting to wonder if they could make it through another round of budget cuts.

“We can no longer stand the cuts we have in the past,” says Michael D. Weekes, president of the Massachusetts Council of Human Service Providers, in Boston. “There’s a real fear and anxiety in the human-services community.”

Mr. Weekes says that despite the difficult times, he hopes a new letter-writing campaign started last week can persuade the governor to provide $67.5-million to social-service programs for the 2005 fiscal year. Part of the money would provide a pay raise for 30,000 employees at charities dependent on state funds who haven’t received a salary increase in three years, he says. Without the new funds, “the price is too much to ask them to endure.”

The reports, “Fiscal Crisis in the States: Its Impact on Nonprofit Organizations and the People They Serve” and “A Divided Community: The Effects of State Fiscal Crises on Nonprofits Providing Health and Social Services,” are available online at http://www.nonprofitresearch.org.